New York’s financial regulator releases a draft of ‘BitLicense’ for Bitcoin businesses. Here are my initial thoughts.

by on July 17, 2014 · 4 comments

Today the New York Department of Financial Services released a proposed framework for licensing and regulating virtual currency businesses. Their “BitLicense” proposal [PDF] is the culmination of a yearlong process that included widely publicizes hearings.

My initial reaction to the rules is that they are a step in the right direction. Whether one likes it or not, states will want to license and regulate Bitcoin-related businesses, so it’s good to see that New York engaged in a thoughtful process, and that the rules they have proposed are not out of the ordinary.

That said, I’m glad DFS will be accepting comments on the proposed framework because there are a few things that can probably be improved or clarified. For example:

  1. Licensees would be required to maintain “the identity and physical addresses of the parties involved” in “all transactions involving the payment, receipt, exchange or conversion, purchase, sale, transfer, or transmission of Virtual Currency.” That seems a bit onerous and unworkable.

    Today, if you have a wallet account with Coinbase, the company collects and keeps your identity information. Under New York’s proposal, however, they would also be required to collect the identity information of anyone you send bitcoins to, and anyone that sends bitcoins to you (which might be technically impossible). That means identifying every food truck you visit, and every alpaca sock merchant you buy from online.

    The same would apply to merchant service companies like BitPay. Today they identify their merchant account holders–say a coffee shop–but under the proposed framework they would also have to identify all of their merchants’ customers–i.e. everyone who buys a cup of coffee. Not only is this potentially unworkable, but it also would undermine some of Bitcoin’s most important benefits. For example, the ability to trade across borders, especially with those in developing countries who don’t have access to electronic payment systems, is one of Bitcoin’s greatest advantages and it could be seriously hampered by such a requirement.

    The rationale for creating a new “BitLicense” specific to virtual currencies was to design something that took the special characteristics of virtual currencies into account (something existing money transmission rules didn’t do). I hope the rule can be modified so that it can come closer to that ideal.

  2. The definition of who is engaged in “virtual currency business activity,” and thus subject to the licensing requirement, is quite broad. It has the potential to swallow up online wallet services, like Blockchain, who are merely providing software to their customers rather than administering custodial accounts. It might potentially also include non-financial services like Proof of Existence, which provides a notary service on top of the Bitcoin block chain. Ditto for other services, perhaps like NameCoin, that use cryptocurrency tokens to track assets like domain names.

  3. The rules would also require a license of anyone “controlling, administering, or issuing a Virtual Currency.” While I take this to apply to centralized virtual currencies, some might interpret it to also mean that you must acquire a license before you can deploy a new decentralized altcoin. That should be clarified.

In order to grow and reach its full potential, the Bitcoin ecosystem needs regulatory certainty from dozens of states. New York is taking a leading role in developing that a regulatory structure and the path it chooses will likely influence other states. This is why we have to make sure that New York gets it right. They are on the right track and I look forward to engaging in the comment process to help them get all the way there.

  • Alex

    The one good thing is that this is just a DRAFT for the new rules, and that Mr. Lawsky is open to discussion. This is a key point in the history of cryptocurrencies, and it will be worth every effort to help the regulators get it right. The current state of this draft is insane.

  • Chris Camp

    I applaud Lawsky for tackling this, he’s clearly a fan of blockchain tech, basically defending bitcoin on today’s CNBC interview. But there are some issues with this initial draft. I agree with your assessment, those three represent real challenges.

    I do wonder how well blockchain-tech will fit within traditional regulatory schemes, if there may be certain core features of bitcoin that can’t be maintained under any imaginable regulatory scheme that would be acceptable to the US or any western country. Take the first issue you raise, short of a panoptical international regulatory/surveillance scheme there will be leakage of bitcoin to unidentified bitcoin addresses.

    I’m a little reticent to commit to the idea that bitcoin is wholly antithetical to regulation, I remember the rhetoric from the early days of the internet, Barlow’s “you have no sovereignty where we gather…” And the internet was tamed, Post-Snowden the internet felt defeated even, but it’s not yet clear how the blockchain can be contained and our traditional freedoms maintained. It’ll be fun to watch.

  • http://igg.me/at/prismicide FredLeTamanoir

    This is pure madness…The original document ( http://www.dfs.ny.gov/about/press2014/pr1407171-vc.pdf ) will probably won my personal 2014 facepalm award.

    … and people probably underestimate this part :

    page 21 : “Records of non-completed, outstanding, or inactive Virtual Currency accounts or transactions shall be maintained for at least five years after the time when any such Virtual Currency has been deemed, under the Abandoned Property Law, to be abandoned property.”

    => i am afraid it means that the state should be able to seize inactive accounts. Well… as it can’t be done without private keys…. so?????

    (not a single word about private key control in the whole document)

  • http://www.friv5star.com friv 5

    framework proposed permit and other relevant regulations are necessary for a consistent and legitimate. I think that there are many factors guaranteed.

Previous post:

Next post: